It was perhaps inevitable that the Republican effort to pass a vast fiscal package this year would, at some point, get caught up in the thicket of the state and local tax deduction.
After all, the deduction, often called SALT, has long had the potential to cause a political standoff. Many G.O.P. lawmakers abhor it and, in 2017, imposed a $10,000 limit on the amount of state and local taxes Americans can write off on their federal returns. But to pass a tax bill this year, the party will need the support of a motivated clutch of Republicans who have made lifting that cap the animating promise of their political careers.
Those lawmakers, who represent high-tax states like New York and New Jersey where the deduction is cherished, say they are willing to tank the package over the issue. Representative Nick LaLota, Republican of New York, can already visualize voting against the bill.
“There’s a green ‘yes’ button and there’s a red ‘no’ button to press. Come time, if there’s not enough SALT in this bill, I’m pressing the red ‘no’ button,” he said. “It is a hill I am willing to stake my entire congressional career on.”
Attempts by House Republican leaders to reach a deal with members like Mr. LaLota yielded little progress this week, leaving the issue unresolved as G.O.P. lawmakers prepare to release the first draft of their tax bill next week. Along with Medicaid, the health care program for the poor that Republicans have targeted for cuts, the state and local tax deduction could determine the fate of the entire G.O.P. legislative agenda.
That’s because any change to the current $10,000 limit would be incredibly expensive, threatening to swamp the overall Republican budget for tax cuts. Even a relatively modest change, like doubling the cap for married couples, would cost $230 billion over a decade, according to the Committee for a Responsible Federal Budget. More generous alterations along the lines of what New York Republicans have demanded could surpass $1 trillion.
Republicans are juggling several other big-ticket tax cuts, namely the roughly $4 trillion cost of extending the rest of the 2017 tax bill, and many do not want to dedicate significant resources to what they see as a handout to rich residents of blue states. In the House, lawmakers have given themselves a $4.5 trillion allowance for cutting taxes, a sum that could shrink if the party does not also cut $2 trillion in spending.
“My bottom line is, we need to have a fiscally responsible package,” said Representative Greg Murphy, Republican of North Carolina. “It is pathetic that we have to bail out high-tax states.”
Republicans created the $10,000 limit in the first place to help offset the cost of the tax cuts they passed in 2017, including lowering individual income rates and creating a larger standard deduction. Experts across the ideological spectrum support the SALT cap and even favor eliminating the state and local tax deduction entirely.
Not only did the $10,000 limit help simplify the tax system and push more Americans toward taking the standard deduction, it also pared back a benefit that had flowed to richer Americans who pay a lot of state and local taxes.
“The SALT cap was probably the most progressive element of the Tax Cuts and Jobs Act, which otherwise cut taxes for higher-income people,” said Leonard Burman, who co-founded the Tax Policy Center, a think tank.
Those who would raise the $10,000 cap argue that it was a political attack on residents of heavily Democratic states. Ever since the creation of the cap, a rotating cast of Republican and Democratic lawmakers have demanded its abolition, complicating legislative negotiations under both President Joseph R. Biden Jr. and now President Trump. (In a twist, Mr. Trump said he would support raising the SALT limit during last year’s presidential campaign).
Opponents of the cap argue that the longstanding ability to write off state and local tax payments has helped support funding for public education and other local services. And real estate agents warn that the SALT cap has raised the cost of homeownership, in turn reducing demand for houses in high-tax areas.
Gerhard Randers-Pehrson, an 81-year-old resident of Ossining, N.Y., believes the $10,000 cap should go up — but not too much. While Mr. Randers-Pehrson, a retired research scientist, said he paid $16,000 in state and local taxes last year, he does not expect to personally benefit from a higher cap. He would take the standard deduction instead of itemizing. But the issue still bothers him.
“I don’t think we should punish areas that try to do right by the municipal services they provide,” he said. His congressman, Representative Mike Lawler, a Republican and one of the holdouts on the issue, has proposed lifting the cap to $100,000 for individuals and $200,000 for married couples. Mr. Randers-Perhson believes such an increase would be too high.
Even among Republicans who want to raise the limit, agreeing on a demand has been a challenge.
Representative Jeff Van Drew, Republican of New Jersey, has said that a cap around $30,000 or $40,000 would be acceptable, while a group of four New York Republicans put out a statement on Thursday calling a $30,000 cap “insulting.” Representative Young Kim, Republican of California, recently floated a $62,000 deduction per individual. Representative Nicole Malliotakis, a New York Republican on the Ways and Means Committee, meanwhile, has suggested that Americans under a certain income limit should be able to take the full deduction.
“I was always focused on people that I represent in Staten Island and Brooklyn, who mostly all make under $500,000,” she said.
House Republican leaders remain optimistic they can thread the needle. Beyond SALT, they are also grappling with a last-minute push from Mr. Trump to raise taxes on the rich, though the president appeared to again back away from that idea in a social media post on Friday. “Republicans should probably not do it, but I’m OK if they do!” the president wrote.
If Republicans can’t reach a deal and their legislative agenda collapses, much of the 2017 tax law would expire. That would raise taxes for many people, but it would also eliminate the $10,000 cap, allowing Americans once again to deduct all of their state and local taxes. In practice, however, an alternative minimum tax that is now largely defunct would return and claw back much of those savings.
It’s a scenario House Republicans wedded to expanding the deduction are considering. Twelve Republicans voted against the 2017 tax law, almost all of them from New York, New Jersey and California — including Representative Elise Stefanik of New York, a close ally of Mr. Trump.
Republicans had a large enough majority back then to pass the bill despite the defections. This time around, they can only afford to lose three votes.
“The Ways and Means Committee is going to come up with the number, which is great,” said Representative Andrew Garbarino, Republican of New York. “But that doesn’t mean I have to vote for it.”
Andrew Duehren covers tax policy for The Times from Washington.
The post Republican Agenda Hits Familiar Obstacle: State and Local Taxes appeared first on New York Times.
